The fed funds futures market is pricing in negative U.S. interest rates next year, a scenario the Federal Reserve has said it wants to avoid as many doubt that it would be an effective tool to stimulate growth.
The U.S. central bank slashed the federal funds rate to near zero in March and has launched numerous programs aimed at boosting liquidity and stabilizing financial markets as the U.S. economy reeled from the coronavirus pandemic.Not necessarily. Futures indicate market expectations, but those can change. Futures markets are also highly technical. They will not necessarily reflect what the effective fed funds rate that is bounded by the Fed's target rate will be. It is currently 0-0.
A negative rate policy requires financial institutions to pay for depositing excess reserves with the central bank. By effectively penalize financial institutions for holding their cash, central banks encourage them to lend more. There are limits as to how deep central banks can push rates into negative territory. Investors can avoid being charged negative rates on deposits by choosing to hold cash instead.Negative rates compress the margin that financial institutions can earn from lending. If rates stay negative for long, financial institutions could stop lending, hurting consumers and businesses and eventually damaging the economy.
The non-partisan Congressional Budget Office said last month it expects the U.S. federal deficit to nearly quadruple to a record US$3.7 trillion this fiscal year, as the country combats the effects of the coronavirus outbreak.
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